July 19 (Bloomberg) -- The Organization for Economic
Cooperation and Development proposed a blueprint for cracking
down on tax-dodging strategies used by companies such as Google
Inc., Apple Inc. and Yahoo! Inc.

German Finance Minister Wolfgang Schaeuble called the
OECD’s plan a “major step.” The proposal aims to develop rules
over the next two years preventing companies from escaping taxes
by putting patent rights into shell companies, taking interest
deductions in one country without reporting taxable profit in
another, and forcing them to disclose to regulators where they
report their income around the world.

“It’s a matter of justice and fairness that multinational
companies pay their fair contribution” to national budgets,
Schaeuble told reporters today before a meeting of Group of 20
finance chiefs and central bankers in Moscow. Without “fair
burden sharing, in the end we will destroy even a global, open
economy,” he said.

The 40-page report will complement efforts by deficit-laden
governments to increase revenue they collect from profitable
enterprises. It follows hearings in the U.S. and U.K. revealing
how companies avoided billions in taxes by attributing profits
to mailbox subsidiaries in places like Bermuda and the Cayman
Islands.

The U.K. Parliament has held three hearings since November
on corporate tax dodging -- examining strategies used by Google,
Amazon and Starbucks Corp. In May, the U.S. Senate held a
hearing on Apple’s offshore tax strategies. The companies all
say they’ve complied with international tax laws.

Intellectual Property

“It is clear multinational companies have developed an
unprecedented know-how for minimizing their worldwide tax
pressure,” French Finance Minister Pierre Moscovici said in
Moscow. “These situations are literally impossible to explain
to our fellow citizens.”

A pair of the OECD proposals calls for rules to make it
harder to shift profits by assigning intellectual property, such
as patent rights, to offshore units. Under current law, such
offshore subsidiaries can take credit for profits arising from
patents developed in countries like the U.S. and U.K. --
generally with cash the parent companies provided to them in the
first place.

Mountain View, Calfornia-based Google, for example, has
avoided as much as $2 billion in worldwide income taxes annually
by attributing profits to a subsidiary in Bermuda that holds the
rights to its intellectual property for sales outside the U.S.,
as reported by Bloomberg News in December.

Economic Activity

Though there is no real economic activity going on in
Bermuda “all the returns are in Bermuda,” said Pascal Saint-Amans, director of the Center for Tax Policy and Administration
for the Paris-based OECD, not referring specifically to Google.
“This is wrong, we need to fix it.”

The OECD is a government-funded think tank that was charged
by the G-20 to tackle the issue.

The plan contrasts with the OECD’s previous approach that
critics say enabled corporate-profit shifting and resisted
reform efforts. As reported by Bloomberg News in March, the
agency has seen a revolving door between the top tax officials
that write its guidelines and law firms that advise companies on
manipulating those rules to avoid taxes.

“For an OECD document this is a really strong report,”
said Stephen E. Shay, former deputy assistant secretary for
international-tax affairs at the U.S. Treasury Department under
President Barack Obama and now a professor at Harvard Law
School. “It’s proposing what could be important and positive
changes to international tax rules. Whether the member countries
can get there, that’s an open question.”

OECD Objectives

Achieving the plan’s objectives may be hamstrung by the
role that several European countries -- including Ireland, the
Netherlands and Luxembourg -- play in enabling the avoidance,
said Sol Picciotto, an emeritus professor of law at Lancaster
University in the U.K. and a senior adviser to the Tax Justice
Network advocacy group.

“It depends on governments willing to take measures and
the OECD doesn’t have any power to compel any governments to do
anything,” he said.

The OECD rejected a fundamental overhaul. Under current law
in most developed countries, companies allocate corporate income
for tax purposes based on paper transactions between units under
“arm’s-length” prices, or the amounts that would be paid
between unrelated parties. That has let subsidiaries in tax
havens pay low prices for patent rights, moving profits
offshore.

‘Piecemeal Patches’

A competing approach, considered by the European Union
since 2004, would allocate companies’ profit between countries
based on measures such as sales in each country.

The OECD plan said moving to this system, known as
“formulary apportionment,” is not viable.

The Tax Justice Network, a non-profit group that has
pressured government agencies to work on these issues, called
the OECD plan “a series of piecemeal patches. These patches are
generally to be welcomed, as immediate remedies to the gaping
holes in the broken international tax system.”

The group further criticized the OECD for not opening the
door to formulary apportionment, which it said would tax
companies based on the “genuine economic substance of what they
do and where they do it.” Instead, the agency has “for years
stubbornly clung to the outdated principles of a system devised
80 years ago.”

‘Realistic Assessment’

Last month, the International Monetary Fund issued a report
saying that the possibility of switching to a formulary system
based on actual economic activities such as sales in a given
country deserves “a more thorough and realistic assessment.”

Meanwhile, a coalition of development agencies, including
Oxfam and Christian Aid, criticized the plan for not adequately
including developing countries that are not members of the OECD.

“International tax rules affect everyone and it is often
the poorest countries that suffer the greatest losses due to tax
abuse,” said Oxfam’s senior policy advisor Claire Godfrey. The
groups called on the OECD to adjust its proposal to require
companies to tell regulators in each country where they report
their profits so that such disclosures would be made public.
That way “we can see exactly how much profit they are parking
in tax havens.”

U.K. Prime Minister David Cameron said the OECD report
“shows how taxpayers, governments and businesses all suffer
when some companies manipulate the tax system to avoid paying
their fair share of taxes. And it highlights how much we still
have to do to bring the international tax system, conceived back
in the 1920s, into the 21st century.”

Although the U.K. has been accelerating its own efforts to
help multinationals avoid taxes, Cameron said in a statement
that he would highlight the OECD plan at the G-20 Summit in St.
Petersburg in September. “I will call on fellow leaders to get
behind this action plan to ensure that we break down the walls
of corporate secrecy, once and for all, and that all companies
pay their fair share.”